Nuns, teenagers, a rabbi, a brass band, Justin Butcher – the vigorous choirmaster of the community choir Vox Holloway – and a group of Whitehall cleaners came together in Wesley's cafe in Westminster Central Hall to celebrate a rare victory. The carols they sang had a special twist. "Jingle bells, laundry smells/sweeping night and day/Oh what fun it is to dream of decent rates of pay!"

The celebration was because a firm of private contractors, Telereal Trillium, suppliers of cleaners to the Department for Work and Pensions, had announced that it would pay the living wage to its 500 Whitehall employees from April 2014, an increase of more than £2 an hour. Although the voluntary living wage (£8.55 an hour in London, £7.45 outside the capital) has the support of all three main party leaders, the DWP is the first government department to adopt it. However, the Observer has learned that the Cabinet Office and Ministry of Justice might soon follow.

"If the living wage can be done in one sector of government, why not in all the others?" says Donald Hirsch, who sets the living wage for outside London each year.

So what made Telereal Trillium take the step that could cost it an extra £5,000 a year per employee? "We are obviously aware of the growing public debate around the living wage," says a spokesman. "And we decided it was the appropriate change to make at this time."

In recent weeks Starbucks, Google and Amazon have also found themselves at the sharper end of public debate with regards to the amount of tax they pay in this country, and customers have exercised their clout, affecting profits. The living wage and the issue of who can really "afford" to pay it, like the issue of corporation tax, is fast becoming a benchmark of how we define a fairer more equitable society.

Citizens UK, which describes itself as the national home of community organising in Britain, has campaigned for a living wage since 2001. It hopes that last week marked a milestone in the plight of the one in five of the working population who day in, day out, fail to make ends meet.

Katy Rojas, 41, a human rights activist in Ecuador until she sought refuge in the UK 11 years ago, and Juan Carlos Villa, 40, from Colombia, both cleaners in the Foreign and Commonwealth Office, delivered a letter about the living wage to the foreign secretary, William Hague, in July. The two work for the contractors Interserve. Rojas has a newspaper clipping that reports that Interserve's profits rose 10% to £30.1m in the first half of 2011,

"The small son of a friend told me, "My daddy doesn't love me. He only loves his work." He doesn't realise his father doesn't want to work; he has to do 16 hours a day to survive financially," Rojas says. "It destroys relationships." Her hourly rate will rise a few pence to £6.54 an hour in the New Year. " I have a little dog but soon he has to go, he costs too much," she says.

Last week, Ed Davey, a minister in the Department of Energy and Climate Change, agreed to meet cleaners next month. The cleaners say their team has halved and their work doubled.

Franco Castro, 48, who worked as a bank teller in Colombia, cleans six floors on his own. He works from 7am to 4pm and again from 5.30 to 8.30pm. He has an eight-year-old son who is asleep when he leaves in the morning and is in bed when he returns at 9.30pm. Castro's earnings are £1,100 a month after tax and insurance. "I work so my son has a future," he says.

Ibrahim Kamara, 25, is from Sierra Leone. He has a partner and a three-year-old son, Aaron. He works at the Department for Environment, Food and Rural Affairs from 7am to 2pm and again from 5.30pm to 8.30pm. The living wage would allow him to end his day at 2pm, see his child, gain more qualifications, and fulfil his ambition to become a bus driver. As it is, he takes home £248 a week after tax and pays £100 a week of that in rent. "No matter how hard you try," he says, "you can't get ahead."

Diana Gallego, 39, a single parent with a 17-year-old daughter who has ambitions to go to university, also works unsocial shifts. "I would love a job with animals but to find a job you have to have time and energy," she explains.

At the heart of low pay is outsourcing and retendering that has driven down wages, conditions and staffing levels for years. Tendering also has a Catch 22. Companies say that they support the living wage but clients aren't prepared to foot the bill. Clients, in turn, say it's not for them to dictate terms to the private contractor. It's a game of morality pass-the-parcel. So Boris Johnson, London mayor, supports the living wage yet cleaners on the London Underground and Docklands Light Railway don't receive it.

Last week, the National Union of Rail, Maritime and Transport Workers launched a cleaners' charter that includes a rising living wage, union recognition, an end to outsourcing and improved sick pay and holidays.

Geoff Martin of the RMT says: "Boris gets the kudos but he's yet to properly walk the walk. Even if a contract is midstream he can still send the signal that if a sub-contractor doesn't buck up, they will lose the contract. We are asking the public to text and email their train operators to press on a living wage. Cleaners do a dirty job in bad conditions. They often have no changing rooms, no hot water, nowhere to make a cup of tea and they are doing it for a pittance. Smash-and-grab companies take the profits but we know that if they are embarrassed by the public, they will pay."

Some sectors could afford the living wage, such as banking, while catering would struggle.

Sandy Aird runs Enhance Office Cleaning with 120 staff. In 2010, he decided to pay his cleaners a living wage, resulting in a 38% increase in costs to clients. "Only two clients declined to pay. I was amazed that, at an individual level, all agreed with the concept and could see the benefits in attracting and retaining staff and as good PR," Aird says. A recent survey of Enhance cleaners showed they were happier, more productive, and 27% said they worked harder. "They said the living wage made them feel valued," Aird adds. "As an employer, it's about doing what's right too."

Anilsa Ramos, 36, is seven months into a high-risk pregnancy. She has acute asthma and has been hospitalised twice. She has a 12-year-old son with bone disease, and her mother, 73, and six-year-old niece also live with her. Ramos works 15 hours a week cleaning the Supreme Court. "The Lords are very nice. I pack away their ceremonial robes. They always say, 'Have a good weekend'." Her partner also works as a cleaner seven days a week.

Ramos has a university place deferred for a year. After travel costs, she receives £58.80 a week plus child tax credit (£412 a month) and child benefit (£134). She has a bank loan and £500 outstanding on a credit card. Illness and poor sick pay meant she missed one month on her council tax and was taken to hospital on the day she was due appear in court. As a result she now has a fine of £327 to pay and must find a new place to live, since the landlord sold her home.

"Wages are so little we have no chance to build up savings," she says. "I am frightened that the baby will come and we will all be in a bed and breakfast. I am so worried I can't breathe and I can't sleep." A living wage would allow vital elasticity in a family budget, she says.

In his bedsit in South London, decorated with two miniature Christmas trees next to his fridge and kettle, Konan Koffi, 47, eases his bad back. A doctor's letter refers to "the severity of his symptoms". He worked from 5am to 8am, then 8.30am to 4pm and took on a third shift for three hours in the evening in the Home Office and the Cabinet Office. Five months ago, he became ill. Sick pay is £400 a month, which all goes on his rent. He also has six children to support. "Friends help," he says. "But without the living wage, you kill yourself to do the job."

Valdemar Ventura, 44, is the Cabinet Office cleaner who spoke out on the living wage and was moved from his job on a charge of "gross misconduct" (video). He received Nick Clegg's support and on Friday he heard that his employer, ETDE, would reinstate him if he signed a written undertaking to abide by security requirements. He is delighted.

As Ventura told the carol singing cleaners and their supporters, "If you need something you have to fight for it. You cannot fold your arms and just close your mouth."

Minimum requirements

The national minimum wage (NMW) is not related to the real cost of living. It is compulsory, established in law at £6.19 for those aged over 21. It is set by the Low Pay Commission at the level the market will bear, rather than the level required to live. The NMW is negotiated by employers, unions and government.

The living wage is voluntary. It uses the minimum income standard (MIS), which identifies minimum costs including, for instance, cost of rent, childcare and council tax, decided by a survey of some members of the public as necessary for a minimum accepted standard of living.

The MIS is calculated for each of nine household types, assuming that adults are in work and claiming benefits and tax credits to which they are entitled. The calculation is weighted to come up with one figure, which is then capped so that it is no more than 2% of the average wage increase for that year. If the average increase is 3%, for instance, the living wage is capped at 5%.

Hence the living wage level represents a benchmark which nobody should have to be below, rather than a sum that will meet every household need. A family working with two children would also have working tax credit (WTC) added, so that a London living wage of £8.55 plus WTC would mean that a family received £12.30 an hour.